Section 161
Section 161: computing income at arm's length price
Section 161 opens Chapter X, "Special Provisions Relating to Avoidance of Tax" - India's transfer pricing regime. It is the successor to section 92 of the Income-tax Act, 1961. The core rule: income, expense/interest allowances, and cost-sharing arrangements arising from an international transaction or a specified domestic transaction between associated enterprises must be computed with reference to the arm's length price, not the price actually agreed between the parties.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
The core rule
Any income arising from an international transaction or a specified domestic transaction is determined having regard to the arm's length price.
Any allowance for expense or interest arising from such a transaction is also determined having regard to the arm's length price.
Cost allocation and contribution arrangements
Where, in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for allocating or apportioning any cost or expense incurred (or to be incurred) in connection with a benefit, service or facility provided (or to be provided) to one or more of them, or for contributing to such cost or expense, the cost, expense or contribution allocated to, or made by, any such enterprise is also determined having regard to the arm's length price of that benefit, service or facility.
When the section does not apply
Section 161 does not apply if applying it would have the effect of reducing the income chargeable to tax, or increasing the loss, as computed on the basis of the entries in the books of account for the tax year in which the international transaction or specified domestic transaction was entered into. In other words, arm's length pricing under this Chapter cannot be used to lower an assessee's taxable income or increase a loss.
Frequently asked questions
What kind of transactions does Section 161 cover?
International transactions and specified domestic transactions between associated enterprises, as defined elsewhere in this Chapter.
Can arm's length pricing be used to reduce taxable income?
No - Section 161(4) says the section does not apply where it would have the effect of reducing income chargeable to tax or increasing a loss, computed from the books of account for that tax year.
Does this section also apply to allocated costs between associated enterprises?
Yes - where associated enterprises agree to allocate, apportion, or contribute to a cost or expense connected with a shared benefit, service or facility, that allocation or contribution is also determined at arm's length price.
Related sections
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Talk to our team about transfer pricing complianceLast updated 9 September 2026